Texas Oil Business Running Smoothly Once Again
When Stephen Shore graduated from college in 1985, he wanted to join his parents’ oil well-servicing company in East Texas. But with the price of oil hovering near $10 a barrel, they couldn’t afford to pay him.
What a difference a few bucks a barrel makes.
A year ago, when oil passed $20, Shore brought his Penn State MBA and six years of auto parts industry experience home. He’s applying state-of-the-art management and marketing methods to the family business, TEC Well Services Inc.
Better times are spreading across the Texas oil patch, which accounts for more than a fifth of the nation’s crude output.
It’s not just prices fueling this boomlet. A newly efficient industry, spreading use of high-tech gadgetry, spectacular offshore finds and a significant new gas play in eastern Texas all are contributing to the highest levels of activity in a decade or more.
The rig count is at a 12-year high in Texas, Louisiana and the Gulf of Mexico. New drilling permits in Texas are up by nearly a third this fiscal year over last. Jobs are up, too: Oil and gas employment rose last year for the first time since 1988 (except for slight upturns during 1990 and 1991 amid the Persian Gulf crisis).
While Texas oil may never return to the heady days of Spindletop, overnight boomtowns and “Dallas,” its post-1986 slide appears to be history.
“The wisdom at our firm is that we’re in the beginning of a cycle--not anywhere near the end,” says Ben Guill, managing director of Simmons & Co., a Houston investment bank specializing in the oil-services industry.
The reasons are fundamental, he says: This time, unlike in the early ‘80s, “the cycle’s being driven by good old-fashioned demand for oil and gas, not by expectations of high commodity prices.”
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Matthew Simmons, president of the firm, says surging demand in the former Soviet Union and the rapidly industrializing Far East are pressuring worldwide oil supplies at the same time the exploration and drilling infrastructure has shrunk and reserves are dwindling.
He predicts that over the next five years, worldwide oil demand will climb by 10 million barrels a day and supplies will decline by the same amount. The result: a daily shortfall of 20 million barrels by the year 2001.
Prices of both oil and gas reflect the trend. According to a recent Arthur Andersen study of the biggest petroleum companies, average U.S. wellhead natural gas prices increased 45% from 1995 to 1996. Average U.S. industry-wide wellhead oil prices rose 26% from 1995 to 1996, essentially the highest since 1985 except for a price spike in 1990 during the Gulf War. The price of a barrel of West Texas Intermediate crude, while slipping in recent weeks, entered territory unseen since 1990 by hitting $25 in January.
To small operators like TEC Well Services, based in White Oak, there has been enough new activity over the past two years to justify buying four more used oil rigs at $250,000 apiece. Shore and his parents, Grace and Ronald Shore, now have nine rigs for lease to service problem oil wells. Their main problem is finding workers for the rigs.
For bigger operators like Union Pacific Resources Group, it means a projected $250 million to be spent just in eastern and southern Texas this year on exploration and production activities like lease acquisition, three-dimensional seismic studies and drilling. That compares with $100 million last year.
Unlike some companies that moved overseas for bigger pickings when oil prices bottomed out in the ‘80s, Union Pacific Resources stuck around and that has paid off, says company spokesman Mike Liebschwager.
“We’re focused on rates of return, not necessarily on projects that have very long lead times in areas that have political risk to them,” he says. “Our track record has been successful here.”
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Overall domestic capital spending by the 39 biggest oil and gas companies--13 majors and 26 independents--rose 16% to $19.4 billion last year, the Andersen study found.
The growth reflects the strengthening U.S. economy, which increased demand for oil products, especially petrochemicals, the building blocks for many manufactured goods.
But the biggest reason for the rise in capital spending is lower costs that make profits possible even at $16 or $17 a barrel.
After the oil price crash of 1986 and again in the early ‘90s, oil companies streamlined corporate structures and slashed costs, partly through layoffs that helped drain 500,000 jobs from the domestic industry.
At the same time, the technology for finding and extracting oil and gas dramatically improved. New chemicals, variations on horizontal drilling, updated forms of a type of pipe called coiled tubing that eases servicing of problem wells--all now factor into decisions on whether and how to proceed.
“There’s been a lot of progress in reducing operating costs and capital costs to drill wells, build facilities and then operate those facilities,” notes Steve McVeigh, chief operating officer of Altura Energy Ltd., a company owned by Shell and Amoco that focuses on West Texas. “It has given us a lot more confidence about going forward with long-term enhanced oil-recovery projects.”
By far the biggest impact is coming from three-dimensional seismic surveying, which maps underground formations in previously unavailable detail. Accompanied by new deep-water drilling methods, 3-D seismic is getting impressive results in the Gulf of Mexico, where companies are finding oil that only a few years ago lay hidden beneath massive layers of salt or in waters once considered too deep for development.
Forty-one discoveries have been made in depths greater than 1,500 feet, with the potential for more than 3.5 billion barrels of new oil, industry executives say. Until recently, most oil wells in the Gulf were drilled at depths of several hundred feet.
Three-dimensional seismic also is helping companies find new deposits in West Texas’ hard-rock reservoirs and better determine what enhanced techniques will recover the most remaining oil.
In East Texas, 3-D seismic is fomenting a boomlike rush on natural gas formations known as Cotton Valley pinnacle reefs. Interest is so keen, says oilman Kris Perryman of Athens, that a few months ago land men doing title work at the Henderson County courthouse nearly broke into a fistfight over who would get key documents next.
“It’s gotten into a fever pitch in the last two years,” he says.
In the Cotton Valley reef structures, 3-D seismic is considered critical because of the depth and relatively small size of the gas formations: no more than 80 acres big, as much as 20,000 feet down. Without the details of the 3-D survey, finding one is like aiming at a pond from an airliner in the dark, Perryman says.
How long will the industry’s good news last? While experts like Guill say the future looks good, at least a few others worry that recent demand-driven price hikes for labor and equipment could short-circuit the upswing.
James T. Devlin of Suemaur Exploration Inc., a small independent based in Corpus Christi, says drilling costs have risen 60% over last year, and “we’re considering postponing drilling now in anticipation of a correction.”
The Shores, meanwhile, are taking it all in stride.
“It’s not a boom--it’s an improvement,” Grace Shore insists.
